Sharing a Home Deed With an Ex
Q: My ex-husband pays the mortgage on my home. In return, I have added his name to the deed. If I sell the house and take advantage of the $125,000 profit exemption, is he precluded from using his exemption on his home? How does our arrangement affect my ability to leave my home to my two children? Finally, does our arrangement mean that my home is at risk in the event he is sued? -- B.V .
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A: We’ll take the questions in order. Because you and your ex-husband are divorced, each of you is eligible for a separate $125,000 profit exclusion upon the sale of your principal residence. Even if you use yours, your ex-husband may still use his when he sells his home. (Remember, however, that because you do not own the home by yourself, only your share of the gain is subject to your exclusion.)
Your ability to leave your home to your children depends entirely on how you and your ex-husband hold title to the home. If you are joint tenants with right of survivorship, your ex-husband will automatically inherit the home upon your death (and so would you if he were the first to die). If you are tenants-in-common, you are entitled to leave your half of the home to whomever you wish.
If your ex-husband is sued, your home could very easily be involved in a settlement because it is one of his assets, although only his share would be directly affected. Nevertheless, you could be forced to sell the home or buy out your ex-husband’s share if he required its cash value to settle a debt or judgment.
Liability for Insurance Proceeds on a Home
Q: In a recent column you said that homeowners have about four years to reinvest their insurance proceeds from a casualty loss before those funds are considered taxable by the government. I do not want to reinvest my proceeds, and my attorney says I won’t have to pay taxes on them. Is that right? -- G.K .
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A: The advice is only partially correct. Whether you actually face a tax liability on the unspent insurance proceeds depends on several factors. And you may not know the final answer until you actually sell your home and determine the extent of your gain, if any.
Here is the rule governing unreinvested casualty insurance proceeds: Your settlement is not taxable unless it results in a gain for you. How would that work? Let’s say your home has a tax basis of $100,000 and a fair market value of $500,000. You received a $250,000 insurance settlement from the earthquake that you have decided to spend on your children’s education and an around-the-world cruise. As a result, you would face an immediate tax liability on $150,000--the amount the insurance settlement exceeds your home’s basis. That is the most direct and obvious example. Here’s another.
Your home has a $100,000 basis and a $300,000 market value, and you receive a $25,000 insurance settlement that you will not use to repair your home. Because the settlement is less than your home’s basis, there is no direct or immediate tax liability. However, your house’s tax basis will be increased by the $25,000 amount of the settlement. If you were to sell it for $300,000, and not purchase a replacement home of equal or greater value, you would be liable for taxes on $225,000, not the $200,000 that was your tax basis prior to receipt of the insurance money.
What to Do With Bonds Left After a Death
Q: I recently discovered three U.S. Savings Bonds that my adult son purchased shortly before his death nine years ago. My son had no will at the time of his death, and the bonds had no beneficiary. No taxes have ever been paid on the bonds’ accrued interest. Is there any way I can cash these bonds? Who is responsible for the taxes on the accrued interest? -- B.G .
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A: Assuming that the bonds were held in your son’s name only and that your son had neither a wife nor children, you are entitled as his mother to cash the bonds. To do this you must complete a document entitled “application for disposition as heir entitled,” Form PDF 5336 from the Federal Reserve Bank.
The form is available by calling the Federal Reserve Bank of Kansas City at (800) 333-2919. After completing the form, your signature must be certified, and the document must be mailed with the bonds and a certificate of your son’s death back to the Federal Reserve Bank of Kansas City at P.O. Box 419440, Kansas City, MO 64141.
Once you cash the bonds, you are liable for the income taxes owed on the interest the bonds generated since their purchase.
When Tax Is Deferred on Investment Switch
Q: I am selling a rental property and purchasing another through a 1031 exchange. I expect to receive some money through this transaction. Are these funds taxable, or is any tax deferred until I sell the new property? -- E.V .
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A: The answer depends on the reason you receive cash out of the deal. Remember, to be eligible for a tax-deferred exchange of investment property, you must purchase a piece of real estate of equal or greater value than the one you are disposing of. If you do not reinvest your total proceeds, you are liable for taxes on the invested remainder, what accountants and others commonly refer to as “the boot.” However, if there is another reason you are to receive this cash--a lower interest rate on your new loan would be one--you would not be liable for taxes on the money.
One caution: Such exchanges are sophisticated transactions subject to some fairly strict income tax statutes. You would be wise to consult an attorney or accountant who specializes in these deals before you proceed. The tax consequences if you are ruled ineligible for the tax deferral could be staggering.
